Microbusiness Investment: Your Guide To Making A Living

Microbusinesses are the newest trend among entrepreneurs as they require very little capital to start. According to the Small Business Administration (SBA), there are more than 3.8 million microbusinesses in the United States today. These businesses typically have five or fewer employees and require less than $50,000 in capital to start. Microbusinesses can include freelance writers, artists, designers, eBay and Etsy sellers, tutors, and coaches. One way to invest in microbusinesses is through microloans, which can be facilitated by peer-to-peer lending sites. Microloans can also be obtained through the US Small Business Administration's microloan program, which lends up to $50,000 to small businesses and certain nonprofit childcare centres. Investing in small businesses offers the potential for high returns, diversification, and the opportunity to participate in the success of the American economy.

Microloan investing

With microloan investing, you can help entrepreneurs in developing nations or low-income parts of developed countries. For example, you can use platforms like Kiva.org to support these entrepreneurs. While you won't earn interest on your loans through Kiva, borrowers have agreed to pay back the money, with a claimed 96% repayment rate.

If you're looking to make a return on your investment, you can use other platforms like Funding Circle, which offers historical annual returns of 5% to 7% per year. Microloan investing can also help your business attract positive attention and build trust with your clients.

To get started, you can set up an account on a peer-to-peer lending site and start depositing money. You can then browse the profiles of potential borrowers and decide where to lend money. The borrower agrees to specific terms, such as the interest rate and payback date. They will then repay the loan through the platform, and you can lend again.

Microbusiness structure

Microbusinesses are small businesses that employ fewer than 10 people and are often started with a small amount of capital. They are usually funded with modest startup loans, known as microloans or microcredit.

Microbusinesses can be structured as a sole proprietorship, limited liability company (LLC), corporation, or partnership. The business structure you choose will impact daily operations, ownership, taxes, and risks to your personal assets.

Sole Proprietorship

This is the simplest business structure, especially for a one-owner microbusiness. It is easy to set up and provides complete control over decision-making and operations. However, as a sole proprietor, you are personally liable for the business's debts and liabilities. It is essential to separate your personal and business finances to reduce personal liability.

Limited Liability Company (LLC)

An LLC provides limited liability protection, meaning your personal assets are generally protected from business debts and liabilities. LLCs can be taxed as a pass-through entity, where the business income and expenses are reported on your personal tax return, or as a separate entity, where the business pays taxes separately.

Corporation

A corporation is a more complex business structure and is typically chosen when a business grows and requires additional capital. Corporations offer limited liability protection and allow for the sale of stock to raise funds. They are taxed separately from the owners and are required to hold regular meetings, maintain formal records, and comply with various reporting requirements.

Partnership

A partnership is when two or more people agree to run a business together. In a general partnership, all partners share profits, liabilities, and management responsibilities. In a limited partnership, there are general partners who manage the business and limited partners who are only liable for the amount they invest. It is important to have a detailed partnership agreement outlining the roles, responsibilities, and ownership stakes of each partner.

When choosing a business structure, consider factors such as personal liability protection, tax implications, management control, and the complexity of compliance requirements. Consult with a legal or tax professional to determine the most appropriate structure for your specific circumstances.

Microloan sources

Microloans are a good option for those who want to invest in microbusinesses but struggle to qualify for traditional financing. Microloans are typically small-dollar loans, generally available in amounts of up to $50,000, and are geared towards entrepreneurs who can't qualify for traditional financing, such as startup founders and people with limited credit histories. Microloans are also a good option for businesses owned by women, minorities, and veterans, as well as those in low-income and underserved communities.

• US Small Business Administration (SBA): The SBA microloan program lends up to $50,000 to small businesses and certain nonprofit childcare centers. The SBA provides funds to specifically chosen intermediary lenders, such as nonprofit organizations with lending experience, that then distribute the loans to eligible borrowers. Each lender has its own credit and lending requirements, and they generally require collateral and a personal guarantee from the business owner. As of September 2023, 160 SBA microloan intermediaries serve all 50 states, Washington, D.C., and Puerto Rico.
• Farm Service Agency (FSA): Part of the US Department of Agriculture, the FSA offers two types of farm loans through its microloan program. These loans are designed to help smaller farms, including non-traditional operators, access capital. Farmers can apply for direct farm ownership microloans or direct farm operating microloans. To qualify, you must meet the guidelines outlined by the FSA.
• Accion Opportunity Fund: Accion offers small business loans ranging from $5,000 to $250,000. To qualify, you'll need at least three months in business and a minimum credit score of 600. The annual revenue requirement varies based on the loan program. Accion also offers free business coaching and mentoring, as well as financial resources for small business owners.
• LiftFund: This nonprofit community development financial institution offers SBA microloans, SBA 504 loans, and other specialized types of financing to small business owners in 15 states. LiftFund can work with businesses with limited credit, collateral, or experience. They also provide group training sessions and one-on-one consultations from business coaches.
• Ascendus: A nonprofit lender that offers a range of loan products, especially for startup businesses and those with limited or bad credit. Ascendus's microloan program provides financing of up to $50,000. To qualify, you'll need to have been generating consistent revenue for at least six months, have a minimum credit score of 575, and no more than $3,000 in unpaid or past-due debt.
• Justine Petersen: A not-for-profit corporation based in St. Louis that offers SBA microloans and microloans through partnerships with local community development financial institutions (CDFIs). Justine Petersen's microloans are available up to $50,000, with varying repayment terms and interest rates. They also offer smaller microloans of up to $2,500 through the Able Life program, with no collateral required. This microlender focuses on expanding access to capital, making it a good option for business owners with limited credit history or those in underserved communities. They also provide counseling, training, and mentorship for small business owners.
• Kiva: A nonprofit that offers peer-to-peer microlending in nearly 80 countries. Kiva US offers interest-free microloans of up to $15,000. To qualify, you must apply for pre-qualification and then invite friends and family members to lend to the venture. Kiva then opens the loan to people who help crowdfund the desired amount. You'll have up to 36 months to repay the loan.
• Grameen America: Grameen America has a non-traditional microlending system where you must form a group with four other women, and your group participates in financial training. After the training, each member receives a microloan to build their small business. The women in your group meet weekly to make repayments and receive ongoing education. First-time loans are available from $500 to $2,000 and must be repaid within six months. Grameen America does not require a minimum credit score, business income, or collateral to qualify for funding.

These are just a few examples of microloan sources. Each option has its own eligibility requirements, interest rates, and repayment terms, so be sure to research and compare them to find the best fit for your needs.

Microbusiness taxes

Microbusinesses, or micro-enterprises, are generally defined as businesses operating with fewer than 10 people. They are often praised for their administrative simplicity and flexibility, but they also come with their own set of challenges when it comes to taxes and regulations.

The tax system for micro-enterprises can vary depending on the country. For example, in France, micro-enterprises are subject to a specific tax and social regime. The registration of a micro-enterprise in France is done through a centralized platform, which allows entrepreneurs to declare the creation of their activity, choose their tax and social regime, and register with relevant organizations. This system simplifies administrative procedures and reduces processing times for new businesses.

Micro-enterprises in France benefit from simplified formalities, where they only need to keep a journal with daily details of their receipts and, for those engaged in the sale of goods, a register detailing their purchases. The entrepreneur indicates their annual turnover in their general income tax return, and their taxable profit and tax amount are determined by the tax office.

In some cases, micro-entrepreneurs can opt for a lump-sum payment of their income tax, with a tax rate of:

• 1% of turnover for the sale of goods or provision of housing
• 1.7% of turnover for service providers
• 2.2% of turnover for non-commercial income holders

Companies taxed under the "Micro" scheme in France automatically benefit from a VAT exemption. This means they don't charge VAT to customers but also cannot recover VAT on their purchases, expenses, and investments. This can be a disadvantage for activities requiring expensive equipment.

Micro-enterprises are also subject to the Contribution on Value Added (C.V.A.E.) if their turnover exceeds certain thresholds. The amount of added value for C.V.A.E. calculation is set at 80% of the difference between receipts and purchases during the tax year.

In South Africa, a micro business is defined as having a qualifying turnover of less than R1 million for the year of assessment. This includes total receipts from business activities, excluding amounts of a capital nature and amounts exempt from normal tax. Certain persons and companies are specifically excluded from qualifying as a micro business, such as those with shares in any other company or those with investment income exceeding 20% of their total income.

Microbusinesses often face challenges with financial stability, regulations, and legal requirements. Understanding the tax system and applicable exemptions is crucial for microbusiness owners to ensure compliance and maintain their financial stability.

Microbusiness support

Funding Options:

Microbusinesses often require external funding to get started or expand their operations. Here are some funding options for microbusinesses:

• Microloans: Microloans are small loans, typically provided by banks or non-profit organizations, to individuals or businesses with little to no collateral, credit history, or employment history. Microloans are a common way to support microbusinesses, and platforms like Kiva.org and Funding Circle facilitate such lending.
• Crowdfunding: Crowdfunding platforms like Mainvest or Honeycomb Credit allow retail investors to support small businesses and startups by investing in them.
• Friends and Family: Microbusinesses can also seek funding from friends and family, who believe in their vision and are willing to provide financial support.
• Small Business Loans: Traditional small business loans from financial institutions are an option for microbusinesses with a strong credit history and collateral.
• Grants: Government and private organizations sometimes offer grants to support specific types of microbusinesses, especially in underserved communities.

Advisory and Expertise:

Microbusinesses often face challenges due to their limited resources and infrastructure. Support can be provided in the form of mentorship and advisory services:

• Business Advisory: Microbusinesses can benefit from mentorship programs that pair them with experienced entrepreneurs or business advisors. These advisors can provide guidance on strategy, operations, and financial management.
• Legal and Compliance Support: Navigating legal and regulatory requirements can be daunting for microbusiness owners. Offering legal advice or connecting them with pro-bono legal services can be valuable support.
• Financial Planning: Microbusinesses may lack the expertise for effective financial planning and management. Support can be provided through workshops, webinars, or one-on-one sessions with financial advisors to help them make informed decisions about their finances.

Marketing and Customer Acquisition:

Standing out in a crowded market is a challenge for microbusinesses. Support can be extended to help them with marketing and customer acquisition:

• Digital Marketing: Social media and SEO strategies are essential for microbusinesses to reach their target audience. Support can be provided through training programs, workshops, or even subsidizing their digital marketing expenses to help them gain visibility online.
• Networking Events: Creating networking opportunities for microbusiness owners to connect with potential clients or partners can be beneficial. Industry-specific networking events, trade shows, or local business fairs can provide a platform for them to showcase their products or services.
• Referrals and Testimonials: Word-of-mouth referrals are powerful for microbusinesses. Encouraging satisfied customers to share testimonials or refer their services to others can help build trust and credibility.

Operational Efficiency:

Microbusinesses often juggle multiple responsibilities with limited resources. Support can be offered to improve their operational efficiency:

• Technology and Software: Microbusinesses can benefit from adopting technology and software solutions that streamline their operations, such as accounting software, customer relationship management (CRM) tools, or industry-specific applications.
• Shared Services: Microbusinesses may benefit from shared office spaces, co-working facilities, or shared services arrangements that provide them with access to resources and infrastructure they might not be able to afford individually.

These strategies provide a starting point for supporting microbusinesses and helping them thrive. Each microbusiness is unique, so tailored support that addresses their specific challenges and goals is essential.

Frequently asked questions